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Small business responsibilities

NNCO_SMB Starting your small business


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Contents Introduction Learning outcomes 1 A business owner’s responsibilities 2 Financial terms

2.1 Value added tax (VAT) 2.2 Flat rate VAT – a simplified arrangement

for UK small businesses 3 An example of business accounts 4 Taking money out of a business 5 Running the business: some choices

5.1 Choices to be made 6 Your business 7 Personal reflection 8 What you have learned in this section Section 3 quiz References Acknowledgements Glossary





Introduction

Figure 1 Justice statue in Frankfurt

View description - Figure 1 Justice statue in Frankfurt

Welcome to the Starting your small business course where you

will look at the responsibilities of small business owners. This

section will take approximately three hours to complete.

Once completed you will have the opportunity to obtain the ‘Small

business responsibilities’ badge. In this section, you will:

look at the legal responsibilities of running a small

business in the UK

look at the essentials of business finance

explore some of the options in resourcing a small

business

apply these ideas to real life situations

establish the responsibilities and resourcing options for

your business idea.





To help you along the way, there are a number of activities which

will help you reflect on and understand what you have been

learning within this section, and how you can apply these new

skills and knowledge for yourself.





Learning outcomesBy completing this section and the associated quiz, you will be

able to:

understand the key responsibilities of a small business

owner

understand the ways in which a small business owner

can make money from a business.





1 A business owner’s responsibilities

Figure 2 Know your responsibilities

View description - Figure 2 Know your responsibilities

As a small business owner you will have certain legal

responsibilities. The responsibilities vary depending on the sort of

business structure the business has.

Try this activity to see if you can identify the key responsibilities for

the sole trader and the director of a limited company.

Activity 1Allow about 10 minutes

The activity has 15 statements, seven are true for the sole trader

and eleven are true for the director of a limited company.

See if you can get them all correct, if not you can review the

answers to see the correct ones.

Interactive content is not available in this format.





View comment - Activity 1

Here we have looked at just two of the responsibilities of particular

traders. More detail on these responsibilities and the

responsibilities of other business owners can be found on the

government website.




https://www.gov.uk/working-for-yourself


2 Financial terms

Figure 3 Understanding finance

View description - Figure 3 Understanding finance

When running a small business it is essential to understand key

accounting and finance terms.

We will start by seeing what you know already.


Try this short activity with two questions. In the first question we

ask you to match finance terms with the definition. In the second

question we ask you to complete the statements about VAT by

selecting the most appropriate options from the drop-down lists.

Don’t worry if you get these wrong, you can see the correct

answers by reviewing the quiz at the end and we do explore these

ideas further later.





Interactive content is not available in this format.


2.1 Value added tax (VAT)VAT is very complicated and rather than try to explain it in detail

here we wanted to make you aware that it is something to

consider. You may well feel it is worth obtaining professional

advice in this area to avoid mistakes. There is a lot of guidance

available at the HMRC website.

Figure 4 Value added tax calculator

View description - Figure 4 Value added tax calculator




https://www.gov.uk/government/organisations/hm-revenue-customs


2.2 Flat rate VAT – a simplified arrangement for UK small businessesThe flat rate scheme assumes a certain percentage of a UK

business turnover should be claimed back since VAT registered

businesses do not pay VAT on certain purchases, so rather than

keeping complicated VAT receipts a small business keeps back a

portion of the VAT paid by customers instead of claiming VAT

back. The percentage that is retained depends on the industry the

business operates in.

These comments are only applicable in the UK. If you are not

studying this course in the UK we suggest you research the rules

on VAT in your host country.

The flat rate scheme figure is set depending on the type of product

or service being provided.

For example, our case study Turn-it-round is VAT registered. At

the time of writing, the flat rate scheme figure for business services

is 12%. So if a customer were to be charged £100 for a session,

they would pay £100 + 20% VAT which is £120.

Turn-it-round would work out the VAT (based on the total paid)

£120 x 12% = £14.40 which is then paid to the HMRC in the

quarterly return.





So Turn-it-round would get £5.60 to balance out the VAT that

would have been paid. This means Turn-it-round would not need

to keep VAT receipts for all the goods and services purchased.

The table with current scheme values can be found at:

https://www.gov.uk/vat-flat-rate-scheme/how-much-you-pay







3 An example of business accountsWe will now continue the Bike-a-lot example, this is not intended to

be an accountancy lesson, rather we are using basic figures to

make some simple points.

Figure 5 Piggy bank safe

View description - Figure 5 Piggy bank safe

We will look at Bike-a-lot’s’s finances to demonstrate turnover,

gross profit and net-profit. (To open the case study in a new tab on

a PC, hold down the Ctrl key when clicking.)

Last year Bike-a-lot sold training and tests for £80,000.

The fuel costs for the bikes came to £4000. of 106 1st September 2016



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The certificate and exam fees came to £6000.

Other expenses, loan for the bikes, rent on premises, insurance

and advertising came to £10,000.

Bike-a-lot is not VAT registered.

So the calculations are shown in Table 1.

Table 1 A summary of Bike-a-lot’s finances

Turnover

The total sales revenue not including any VAT. This is the

£80,000





amount of money received from customers.

Gross profit

The total sales revenue taking off the cost of sales, whi

£70,000





ch in this case is the cost of the fuel for the lessons and the certificates and tests that are paid for





: £80,000 − £4000 − £6000.

Net profit

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Bike-a-lot has a turnover of £80,000, this is just below the VAT

threshold of £82,000 (correct at time of writing) so Bike-a-lot does

not have to be VAT registered. What do you think would happen if

the sales revenue increased by £2000 and put it into the category

for mandatory VAT registration?

Bike-a-lot and VATBike-a-lot operates in quite a competitive market. A typical

compulsory basic training course (CBT), the first step to riding,

costs around £100. If the turnover for Bike-a-lot increased to put it





over the VAT threshold, then they would have to charge VAT at

20% (correct at time of writing). So the cost of the CBT would have

to increase to around £120 for Bike-a-lot to make the same gross

profit. For a private customer this is a relatively high increase in

cost for no extra service and could result in a different training

school being chosen.

So the VAT question plays a big part when the small business

serves local customers.

Would you suggest they stop working once the turnover reaches

£81,999?

Figure 6 Reviewing financial performance charts





View description - Figure 6 Reviewing financial performance charts

Now it is your turn, have a look at the finances for case study 5,

Turn-it-round. (To open the case study in a new tab on a PC,

hold down the Ctrl key when clicking.)


Use the simplified accounts figures to work out the turnover, gross

profit and net profit for Turn-it-round.

Last year Turn-it-round received funding totalling

£147,000 to support 300 prisoners.

The transport costs for the sessions came to £8000.

The cost of renting venues for training and seminars

came to £12,000.

Other expenses, staff costs, insurance, general travel

and hotel expenses for staff and volunteers, came to

£120,000.

Turn-it-round is registered for VAT on the flat rate

scheme paying 12% VAT.

Complete the table and comment on the VAT situation.

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easure

xplanation

mount

Turnover

Provide your answer...


Gross profit

Provide

Provide





your answer...

your answer...

Net profit*



VAT

Provid





comment

e your answer...

* Remember that money from the flat rate scheme is part of the net

profit.


Don’t worry if this is still confusing, we are not trying to get you to

calculate your own VAT. In the comments we suggested what

would happen if Turn-it-round had a simple misunderstanding over

VAT, a £7000 profit turned into a £15,000 loss. The message is:

be clear on what VAT commitments there are and make sure the

customer knows if they need to pay VAT. This is a particular issue

when quoting services for clients. This is one area where expert

help could be really beneficial.





4 Taking money out of a business

Figure 7 A pile of £50 notes

View description - Figure 7 A pile of £50 notes

The main, but not only, reason an individual starts a small

business is to provide income of some sort.

We will now look at the different ways money can move out of a

business to the owner. We will use the case study examples of

sole trader, partnership and the director of a limited company, as

examples. (To open the case study in a new tab on a PC, hold

down the Ctrl key when clicking.)




http://www.open.edu/openlearn/ocw/mod/oucontent/olinkremote.php?website=NNCO_SMB&targetdoc=Case%20studies


Sole trader: Mucky PetsAs a sole trader, Alex can make drawings from the business. This

is because there is no distinction between Alex and the business

for tax purposes. Alex submits a self-assessment tax return which

includes a section in the tax return for sole trader income.

It makes sense for Alex to have a separate bank account for the

business and a personal one, so that it is easy to see where the

income and expenses for the business sit. With just one bank

account, Alex would need to separate the figures manually. Alex

pays tax on the profits made in the business.

Alex must remember to pay national insurance contributions as a

self-employed person and remember that all taxable profit from the

sole trader business makes must be included in the self-

assessment tax return as taxable income, even if Alex does not

withdraw the entire profit amount into a personal bank account.

Partnership: Bike-a-lotIf Bike-a-lot is structured as a partnership, Nicky and partner pay

themselves in a similar way to that of a sole trader. They must

discuss this and ensure that the way the funds are drawn are in

line with the rights specified in their partnership agreement (as

each partner has a right to the funds). A separate tax return is

submitted for the partnership but the partnership does not pay any of 106 1st September 2016




tax. The tax is paid in the personal tax returns for the partners –

each pay tax in their personal tax return on the share of the

partnership profit that each receive.

Limited company: JJ ComponentsNow it gets a little trickier.

JJ Components is treated as a separate entity to JJ, even though

JJ is the only shareholder. The company submits a separate tax

return and pays any tax due. JJ submits a self-assessment tax

return. JJ cannot just take money out of the company.

JJ could set up as an employee of the company and get paid a

wage. JJ will need to pay the correct income tax and national

insurance contributions. JJ will also need to be paid a work place

pension in the near future. This is just the same as if JJ worked for

any other company.

In addition, as a shareholder of the company JJ is able to take

money out of the company through payment of a dividend. When it

comes to paying a dividend, it is simply a distribution of profits and

tax is paid through the self-assessment tax return.

An accountant would tell JJ the most beneficial split between

salary and dividends.





Some key points for the limited company

Salary

Any salary paid will attract national insurance

contributions and income tax payments.

To pay a salary, the company must be set up as an

employer.

Salaries are deducted from the company profits and so

reduces the amount of corporation tax paid.

In the near future all employers must provide a work

place pension, even if they only employ one

employee.

Dividends

Can only be paid out of company profits after

corporation tax is paid.

Do not attract national insurance contributions.

Are taxed through the individual’s self-assessment tax

return.





5 Running the business: some choices

Figure 8 Business decisions

View description - Figure 8 Business decisions

We will now look at some of the options and choices businesses

face in how they operate.

In this activity formulate your first thoughts, you can then see if

your views change after reading the rest of the section.






Consider these three options and how they might apply to a small

business, what are the benefits and concerns of:

do it yourself (in-house)

buy the service from someone else (outsource)

employ staff part or full time

use external people such as associates or sub-

contractors

buy equipment outright

lease equipment.

Now for each of these six options give your immediate reaction to

the benefits and concerns.

Option

Benefits

Concerns

Do it yourself

Provide your an

Provide your an





swer...

swer...

Outsource



Employ staff



Use external people



Buy equipment

Provide your answ

Provide your answ





er...

er...

Lease equipment



We will not give our comments here, rather we will discuss some

of the decisions that could be made by our five businesses and

then let you see if your views have changed.

5.1 Choices to be madeRead through these additional points for our five case studies, note

how they approach the six options you have just reviewed.

Bike-a-lot The partners at Bike-a-lot are expert trainers and

computer literate, and whilst they could create a

website, the time it would take would be excessive.

Also since the website is the main point for booking

and payment then the extra confidence of using an IT

expert is well worth the money.





The partners at Bike-a-lot considered leasing the

motorcycles for the training but the high mileage they

expected to cover and the additional insurance

premiums meant that the monthly cost of a business

loan was significantly lower than the leasing costs.

Bike-a-lot do not employ staff but have a number of

associates who can be used at times of high volume

or to cover holidays or sickness.

The partners do lease the storage and training facility.

They have a small unit on an industrial estate. The

cost of buying a training facility was prohibitive and

would take more than ten years to recoup the extra

costs over leasing.

JJ Components JJ did not have a choice over leasing the

manufacturing equipment. With it being specialised

equipment, made to order, therefore purchasing was

the only option.

JJ leases an industrial unit just outside the town. The

leasing is a great option as this allows for the

business to expand and move more easily than

property that is purchased.





JJ employs two assembly technicians. In a business

where quality is paramount, there is a need for a

consistent and skilled workforce.

JJ uses an accountant to deal with his payroll and all

reporting. The cost of the accountant is only £100 per

month and frees JJ to concentrate on the main tasks

of the business.

Mucky Pets The equipment Alex uses is fairly low cost, the largest

expense was the workshop in the garden which was

purchased outright.

In the future Alex is considering going mobile and

leasing a van for this purpose, this would be a good

option.

Alex does not currently employ anyone but as the

business grows then Alex is considering taking on an

apprentice to train and support through the grooming

qualifications.

Red Bush Brewery At Red Bush Brewery, Sam is fairly reliant on the

master brewer. The one full time employee. Whilst

Sam is happy to learn the business and support the





brewer, gaining the skills and experience to run the

brewery alone is not feasible in the short term.

Sam is fortunate to have the farm buildings provided

free of charge and bought the second hand equipment

at a low price.

Because Sam has farm duties in addition to supporting

the brewer, it makes sense to outsource the marketing

and website for the brewery. A local admin firm is

used and they also arrange for casual labour to cover

farmer’s markets, if Sam is not available.

Sam uses the farm accountants to look after the

payroll, getting a really good rate as part of the family

farm.

Turn-it-round Charlie uses Turn-it-round as a way of employing ex-

prisoners. The turnover of staff is quite high, with staff

typically staying with the business for between nine

and twelve months, but this suits Charlie well. The

staff are recruited on their release from prison and

encouraged to develop skills and build relationships.

Charlie sees it as a success when staff are head

hunted by firms they work with.





Turn-it-round does not have significant assets and

hires venues and vehicles as required.

The computers have been leased from a local IT

company. The IT company maintains the computers

and ensures the security is up to date. This was a

requirement of the funding Charlie receives.


Go back and review the table you produced in Activity 4 earlier.

Are there any items you would change, perhaps emphasise or

remove in light of the case studies?

If so, what is it that has caused the change?






6 Your business

Figure 9 Applying your learning





View description - Figure 9 Applying your learning

You may now like to take the ideas discussed so far and link them

to your own business idea. You can do this through two activities.

Activity 6: Create your own business case study in

a similar format to the example case studies.

Activity 7: Answer the questions for the case study

you created.


Creating your own personal case study

Complete the case study information for a business you have

recently started, are thinking of starting or have knowledge of

through friends or family.

Name of business


Bri

Prov





ef description of business and its objectives

ide your answer...

Staffing of business


Bu

Prov





siness assets

ide your answer...

Essential skills


Mandatory licences or insurance ar






rangementsExpected turnover for year 1, year 2 and year 3






To get the most out of this course we encourage you to keep notes

on the ideas you have and the activities you complete. These

notes could be very useful as you move your business idea.

This particular activity is also used in the other sections of this

course and may have already been completed. It is suggested that

you use the same ideas for each section, though you may wish to

change or develop your ideas as you go through the different

sections.


Use the personal case study you have developed to answer the

questions and suggest how you might arrange the finances and

resources for the business.

Key question

Answers

Implications

What are the owner responsibilities for the

Provide your

Provide your





business? answer...

answer...

Is the business likely to have employees?



Should the business retain an accountant?



Should the business be registered for VAT?



What services will be outsourced?

Provide your an

Provide your an





swer...

swer...

How will the owner of the business get money from the business?



Summary






7 Personal reflectionHaving completed this first section we suggest you take a few

minutes to reflect on what you have learned so far. You may want

to save your answers in this activity (and others in this section) in a

separate document for use after the course.


Note down your thoughts on the following questions:

What do I now know about starting up a business that I did not know before starting this section?


What things did I already know but have been confirmed through this section?


What will I now do as a result of studying this section?






8 What you have learned in this section Small business owners have legal and financial

responsibilities.

The responsibilities vary with the business structure

used within the business.

VAT is complicated and its application depends on the

turnover of the business.

Getting professional help on VAT is worth considering.

The way you get money out of a business is

dependent on the business structure chosen.

There are options on how a business should operate,

the best options vary business to business.





Section 3 quizWell done, you have now reached the end of Section 3 of Starting your small business, and it is time to attempt the assessment

questions. This is designed to be a fun activity to help consolidate

your learning.

There are only five questions, and if you get at least four correct

answers you will be able to download your badge for the ‘Small

business responsibilities’ section (plus you get more than one try!).

I would like to try the Section 3 quiz to get my badge.

If you are studying this course using one of the alternative formats,

please note that you will need to go online to take this quiz.

I’ve finished this section. What next?You can now choose to move on to Section 4, Succeeding in a small business, or to one of the other sections, so you can

continue collecting your badges.

If you feel that you’ve now got what you need from the course and

don’t wish to attempt the quiz or continue collecting your badges,

please visit the Taking my learning further section, where you

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We would love to know what you thought of the course and how

you plan to use what you have learned. Your feedback is

anonymous and will help us to improve our offer.

Take our Open University end-of-course survey.




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ReferencesUK Government (2014) VAT Rates on Different Goods and Services [Online]. Available at:

https://www.gov.uk/guidance/rates-of-vat-on-different-goods-and-services (Accessed 3 April 2016).

UK Government (2015) VAT Flat Rate Scheme [Online]

Available at: https://www.gov.uk/vat-flat-rate-scheme/how-much-you-pay (Accessed 3 April 2016).

UK Government (2016) Working for Yourself [Online]. Available

at: https://www.gov.uk/working-for-yourself (Accessed 3 April

2016).




https://www.gov.uk/working-for-yourself



https://www.gov.uk/guidance/rates-of-vat-on-different-goods-and-services



AcknowledgementsExcept for third party materials and otherwise stated in the

acknowledgements section, this content is made available under a

Creative Commons Attribution-NonCommercial-ShareAlike 4.0 Licence.

The material acknowledged below is Proprietary and used under

licence (not subject to Creative Commons Licence). Grateful

acknowledgement is made to the following sources for permission

to reproduce material in this unit:

Figures

Figure 1: © Querbeet/iStockphoto.com.

Figure 2: © vchal/iStockphoto.com.

Figure 3: © cigdemhizal/iStockphoto.com.

Figures 4–9: courtesy Moore Effective Solutions Ltd.

Every effort has been made to contact copyright owners. If any

have been inadvertently overlooked, the publishers will be pleased

to make the necessary arrangements at the first opportunity.







Glossarydrawings

If a business is a sole trader or partnership basically the ‘salary’ is in fact drawings which are taken out of the business. Tax is not paid on drawings but is assessed on the profits of the business.

gross profitProfit made directly on sales. Gross profit = sales − cost of goods. Does not include business expenses etc.

net profitThe profit after all costs, are taken into account. Net profit = sales − cost of goods − operating expenses − other expenses − interest − taxes.

turnoverTurnover is the amount of money taken by a business in a specified period, usually annually. It is simply a term that means the total amount of money entering the business from sales. It includes money spent on raw materials, hire equipment and subcontracting. For example, a kitchen fitter who fits a new kitchen for a client has two choices: either the client buys the kitchen for £5000 and the fitter charges £1000 to fit it (so the turnover for the fitter would be £1000); or the fitter buys the kitchen for £5000 and fits it for £1000 (so the turnover would be £6000). Even though the amount of money earned is the same, the turnover depends on who pays for the kitchen.

VATValue added tax. Currently a 20% tax applied to goods and services from VAT registered businesses.





Activity 1CommentSome key points from the table

The sole trader is responsible for all the business

costs and expenses, just as if they were their personal

costs and expenses.

The director is not personally responsible for the

business expenses.

You will notice that neither the sole trader nor the

director are required to retain an accountant. It may

well be a good idea, but it is not a legal requirement.

Both the sole trader and the director must register for

and submit self-assessment tax returns (an

accountant can also do this for them).

Both the sole trader and the director must register for,

and charge VAT if the business turnover reaches the

threshold.

The sole trader would normally pay Class 2 and Class

4 national insurance; this is not necessarily the case

for the director or those past retirement age.

The director has responsibilities to the other

shareholders (if there are any) and must run the





business in a specific way as set out in the ‘articles of

association’. These are instructions on how meetings

should be run and how decisions should be made in

the business.

Back to Session 1 Activity 1





Activity 2CommentDid you notice the differences between gross profit, net profit and turnover?

These terms are often confused but they are important when

making decisions moving forward, we will explore these further

when we look at our case studies.

Was there anything about VAT that surprised you? Did you know

that the flat rate scheme existed and that it could be used by any

business with a turnover less than £150,000 (figure accurate at

time of writing, the HMRC website will give the most up to date

figures for this).







Activity 3CommentHere are our thoughts.

Measure

Explanation

Amount

Turnover

The total amount of f

£147,000





unding received is £147,000 before VAT, so





this is the turnover.

Gross profit

The cost of running

£127,000





the sessions is the transport costs of £80





00 and the venue hire of £12,000. The spec





ific activity expenses are not broken down





so the gross profit is £147,000 – £20,000





.

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Activity 5CommentWhat we hope you got out of this activity is a sense that there is no

one right approach. The decisions on how you approach and

resource your business will depend on your circumstances.

You will need to look at your skills, situation, objectives, resources,

finances and ambitions before making a decision.






Figure 1 Justice statue in FrankfurtDescriptionThe image shows the Lady Justice statue in Frankfurt against the backdrop of a blue sky.

Back to Figure 1





Figure 2 Know your responsibilitiesDescriptionA photo of a tax law.

Back to Session 1 Figure 1





Figure 3 Understanding financeDescriptionA photo of a calculator and financial spreadsheet.






Figure 4 Value added tax calculatorDescriptionThe image shows a graphic of a person standing by a large calculator. On the top are the words ‘Value Added Tax VAT’.






Figure 5 Piggy bank safeDescriptionThe image shows a shiny silver piggy bank. On the side is a safe lock.






Figure 6 Reviewing financial performance chartsDescriptionThe image shows a performance chart on a piece of paper. One particular section has been magnified and is presented in 3D.






Figure 7 A pile of £50 notesDescriptionThe image shows a pile of £50 notes grouped into batches.






Figure 8 Business decisionsDescriptionThe image shows a crossroads post with lots of destinations. These include ‘employ staff’, ‘sub-contract’, ‘lease?’, ‘in house?’, ‘outsource?’ and ‘buy’.






Figure 9 Applying your learningDescriptionThe image shows a graphic of a person sitting on a bench, and writing on a piece of paper. Their left hand is pointing to the sky, where a flashing lightbulb is floating above.





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